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5 things to know about farm loan waiver
Farm loan waivers are generally brought about by a lethal combination of drought, farmer suicides and political uncertainty in India. The same factors compelled governments in four states – Uttar Pradesh, Maharashtra, Punjab and Karnataka – to write off farmer loans in recent weeks. But while loan waivers benefit individual farmers, it can hobble India’s economy and its stricken banking sector. Private borrowers also get mired in the problem by ending up paying higher interest rates.
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Fiscal burden AThe total loan waivers announced by the four states amount to 0.4% of the country’s GDP (gross domestic product). A Mint Street Memo issued by the Reserve Bank of India observed that the spate of waivers could add to the country’s fiscal burden over the medium term.
It further read: “It is also pertinent to note that random fiscal policy shocks, such as loan waivers, have an enduring impact on market borrowings, as evident from past episodes of such waivers.”
The loan waivers will impact the four states too. Only Maharashtra has the fiscal capacity to pay off its Rs 30,000 crore waiver. The other states would have to put a squeeze on expenditure in key areas like education, nutrition, energy and transportation to come out of the situation unscathed.
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Inflation Insufficient finances can make such populist waivers risky for state governments. Reserve Bank of India governor Urjit Patel recently warned that the “slippery path” of granting waivers could affect “inflation sooner or later”. The RBI estimates that inflation could increase by 0.2% due to the waivers.
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Interest rates There could be two reasons for the increasing reliance on Equity funding—banks are hesitant to lend while the stock markets have been bullish. After all, Indian banks are busy dealing with bad loans or non-performing assets (NPA). Bad loans—as a percentage of total loans—are expected to touch 9.9-10% in FY18, according to an Economic Times report. The greater the bad loans, the lesser the cash that banks will have for lending. In fact, a Fitch report suggests that Indian banks will need a fresh capital of $65 billion by March 2019 to make up for the bad loans.
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Banks Repeated occurrences of loan waivers hurt the credit culture in the country. Public sector banks will be the worst affected because of their high exposure to agriculture and farm loans.. “Frequent occurrence of such populist actions leads to risks of impaired credit discipline and weak risk-reward for banks and reduced credit availability for borrowers,” a Kotak Institutional Equities report stated. RBI governor Urjit Patel has similarly warned of such waivers, saying they would only provide “short-term relief to distressed farmers” but eventually lead to a “bad credit culture”. Further, ingraining of “bad credit culture” would only undermine the banks’ efforts to tackle bad loans.
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Solution Farm loan waiver is a temporary solution that leaves long-lasting problems. Instead of creating any assets and inculcating credit discipline, it affects other sectors of our economy.
Crop insurance, better infrastructure and technology-enabled productivity improvements are a few ways to curb such fiscal brazenness.
The Indian government’s initiative to establish a nationwide market for agriculture produces is an important step in this direction. The government also aims to double farmers’ income in the next few years to avoid further write-offs.
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15 lakh
Number of bogus farmer accounts that will be detected by the Maharashtra state government. These accounts were created to take advantage of government's policy of providing agricultural loans to farmers at 0% interest.
